Question

All sales and purchases for the year at Ross Corporation are credit transactions. Ross uses a perpetual inventory system. During the year, it shipped certain goods that were correctly excluded from ending inventory although the sale was not recorded. Which one of the following statements is correct?

a) Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated.
b) Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was understated.
c) Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated.
d) Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected.

Answer 1

The correct answer is that accounts receivable and sales were understated while inventory was not affected and cost of goods sold was also understated, since the sale was not recorded but goods were correctly excluded from the inventory.

Step-by-step explanation:

The question pertains to accounting transactions in a perpetual inventory system. When Ross Corporation ships goods and fails to record the sale, the financial statements are affected as follows:

• Accounts receivable is understated because the sale has not been recorded, meaning the amount owed by the customer is not reflected on the balance sheet.
• Inventory is not affected, as the goods were correctly excluded from ending inventory—they no longer count as an asset of the company since they have been shipped.
• Sales are understated because the transaction has not been recorded on the income statement, causing revenues to appear lower than they actually should be.
• Cost of goods sold (COGS) is understated because the cost associated with these goods has not been transferred from inventory to cost of goods sold, which would reduce the inventory and increase expenses to reflect the shipment of the goods.

Given these considerations, the correct statement would be:

Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was understated.